Sole Trader Unlimited Liability Partnership Company Limited Liability
Partnerships Professionals such as doctors, lawyers,dentists, vets, accountants are not allowed to form companies. There are advantages to partnerships over forming a company from the point of view of tax, accounting and disclosure requirements. Partnerships do not go through a registration process to form. Partnership is not a separate legal identity = partners have unlimited liability, unlike directors or shareholders in companies. The downside is that each partner is liable for the losses of his co-partner in carrying on the partnership business, even where the other partner has defrauded clients of the business.
Partnership Act 1890 - Amended 1907 Partnership Act 1890 defines a partnership and essentially states that where 2 or more people carry on business with a common view of profit, then a partnership exists. A written partnership agreement is not necessary. The act applies where no partnership agreement is in place.
The Main Provisions 1.P&L must be shared equally 2.No interest paid on capital 3.No remuneration 4.Differences settled by majority 5.Change of business requires consent of all 6.No right to expell a partner 7.No right to retire 8.All Partners have the right: 1.Take part 2.Prevent entry of another partner 3.Examine the books 4.Receive interest 5%PA on loans/advances ex capital 5.Dissolve the partnership 9.does not prevent a former partner from competing after leaving 10.Partnership dissolves automatically on 1.death of partner 2.bankruptcy of partner 3.Illegal activity of partnership
Written Agreement Written partnership agreement is crucial to set out: Function of the partnership Capital each partner will invest The profit sharing ratio The role of each partner Drawings – remuneration Expulsion New partners non compete agreement Dissolution etc. Written Partnership agreement overrides the terms of the act
Capital A/C Records the original monies invested Usually remains fixed unless – More capital introduced – Non-current assets re-valued – Goodwill crystallised and recognised Credit balance – Credit the giving: partners giving capital to the business
1 ABC Opening credit balances 2 B introduces additional capital 3 C withdraws capital 4 ABC Capital upward adjustment for recognition of goodwill and positive re-valuation of assets Capital Account DATEDETAILSPARTNERSDATEDETAILSPARTNERS ABCABC 3/3/..BankX1/1/..Balance b/dXXX 2/2/..BankX 31/12GoodwillXXX 31/12Balance c/d XXX31/12RevaluationXXX XXXXXX 1/1/..Balance b/dXXX
Current A/C Short term element of each partners capital Record for each partner – Share of profit/loss – Drawings – Interest on loans given to partnership – Interest on credit capital Corresponding entry in appropriation
Current A/C - Partner A DATEDETAILS€DATEDETAILS€ 31/12/..Drawings1/1/..Balance b/d 31/12/..Interest on Draw31/12/..Interest on Cr bal 31/12/..Interest on Cap 31/12/..Loan Interest 31/12/..Balance c/d31/12/..Share of Profits 1/1/..Balance b/d
Partner A Debit Drawings – withdraw from cash instead of salary Interest on drawings – charge for overdraw Credit Interest on Credit balance – interest on investment held in the current account Interest on Capital – interest earned on original investment Loan Interest – interest due (not yet paid) for a loan given to the partnership Share Profits – divide of profit
Current A/C - Partner B DATEDETAILS€DATEDETAILS€ 1/1/..Balance b/d31/12/..Interest on Cap 31/12/..Drawings31/12/..Share of Profits 31/12/..Interest on Drawings 31/12/..Salary 31/12/..Interest on Debit bal 31/12/..Balance c/d 1/1/..Balance b/d
Partner B Debit Interest on Debit balance – money take out of the partnership/loan from business – interest charged Credit Salary – reward for taking extra responsibility or work
Current A/C - Partner C DATEDETAILS€DATEDETAILS€ 31/12/..Drawings1/1/..Balance b/d 31/12/..Interest on Draw31/12/..Interest on Cr bal 31/12/..Interest on Cap 31/12/..Salary 31/12/..Balance c/d31/12/..Share of Profits 1/1/..Balance b/d
Partner C DebitCredit Capital – partner introduced more capital to the business.
Appropriation A/C In a partnership, the profits earned are due to the various partners in their profit sharing ration and are apportioned to them in the appropriation section on the Statement of Comprehensive Income 3 Sections – Distributable income (Profit for year) – Balance of Net Profit – Share of Profit (as per PSR)
Appropriation Account for year ended 31/12/.. €€ Gross ProfitX Other Partnership Expenses(X) Interest on Loan by partners to business(X) Profit for YearXX *Other Comprehensive income for the yearX Total Comprehensive income for the yearX *Distributable income (Profit for year)XX
Appropriation Account for year ended 31/12/.. Salaries: A(X) B C Interest on capital Accounts: A(X) B C Interest on Current Accounts: A(X) BX C Interest on Drawings: AX BX CXX Balance of Net ProfitXXX
Appropriation Account for year ended 31/12/.. €€ Share of Profit (as per PSR) AX BX CXXXX
Statement of Financial Position Equity Section – List of the closing balances from the partners capital and current accounts.
Statement of Financial Position as at 31/12/.. €€ Capital Account AX BX CXX Current Account AX B(X) CXX XX